The following paper is based on a talk given by George Vegh of McCarthy Tetrault, at the APPrO 2008 conference on November 18.
2008 marks the 10th year anniversary of Bill 35, which implemented the restructuring of the Ontario electricity sector. It therefore provides a good opportunity to reflect back on some of the major expectations for restructuring, where we are now, and to look to where we may be going in the future. I would like to look at this restructuring through the perspective of public utility regulation. This perspective is a good one because the transition that was contemplated by Bill 35 is, in many ways, a transition from one method of public utility regulation to another.
Specifically, the passage of Bill 35 and the introduction of competition in Ontario’s power sector was a transition from a system of public utility regulation based on public ownership as a means of regulation to what is called discretionary regulation, meaning the transfer of decision making authority from the government to independent regulatory agencies.
The basic point that I would like to make is that, when this transfer was anticipated 10 years ago, the model that was adopted was based on fairly well-developed theory of public utility regulation that was built on a premise of depoliticized energy regulation. That premise no longer holds true. So things did not work out as many people thought they would, and it is necessary for us to figure out a way for public utility regulation to have value in a more politicized energy environment.
Initial Expectations of Public Utility Regulation
The model adopted 10 years ago in Bill 35 was based on a body of theory that saw public utility regulation as depoliticized decision-making. This is reflected in two fundamental premises. The first premise is that decisions respecting public utility regulation are based on a very narrow range of values: In other words, these decisions are technical and based on concerns of economic efficiency and, in particular, the need to regulate because of the existence of market failure. As a result, regulation is exercised only when there is market failure and only to remedy the market failure. Further, it was understood that the purpose of the regulation is to mimic what would be the outcome of a market, if only the market could work. So market failure sets both the purpose and the scope of public utility regulation. In the energy sector, the subject matter of regulation is therefore confined largely to network industries. The remainder of the sector should be subject to market forces.
This idea is most clearly reflected in the forbearance power of the OEB, which requires the Board to not regulate if it finds that competition is sufficient to protect the public interest.
The second premise of this form of regulation, which is closely related, is that the decisions, being technical, should be made by independent agencies based on their technical expertise, largely free of government interference. In other words, the decisions are technocratic and should be made by technocrats. The basic value here is independence.
These two premises formed the basic structure of our institutional arrangements in this sector and their assumptions informed the basic ethic of these institutions. In other words, the sector was designed to be depoliticized.
The Current State
It is not difficult to argue that these expectations never materialized. Energy decisions did not prove to be simply technical decisions, they have remained political. By political, I don’t mean to say political in a pejorative sense. I mean political in the sense that the range of values that are taken into account in making decisions cover a broad range of social, environmental, economic consideration, and not just a narrow range of considerations of economic efficiency.
So, political decision making has not been replaced by technocratic decision making.
Also, the government has not transferred independent decision making authority to agencies. The government continues to play a very large role. It is arguable that under today’s system, the government has more direct and practical control over energy regulation than it could ever have exercised under Ontario Hydro. Further, the government has direct access to regulatory tools that it never had in place before, including directing the inclusion and disposition of costs in deferral accounts, setting terms of licences, and giving directions of supply mix and procurements.
So the basic principle of the new structure that was to be ushered in under Bill 35 never actually came into being, or if it did, it did not last very long.
However, such an observation is not necessarily a criticism. The type of discretionary regulation contemplated by Bill 35 is not inherently better than the nationalization approach that existed prior to that time or inherently better than alternative forms of regulation. Each form of regulation has its own strengths and weaknesses.
There is also nothing inherently the matter with changing course from one regulatory approach to another. Regulation and regulatory approaches are means, not ends. So, if governments want to depart from various models, they should of course be free to do so. I don’t think that this is contestable.
However, there is, in my view, today a mismatch between what our institutions were designed to achieve and how they are currently expected to operate. And this mismatch leads to a dissonance in our system that should be more clearly addressed.
When Ontario set up the present system 10 years ago, there was a lot of thought given to how it should be structured in light of what it was meant to achieve. We have abandoned some major premises of those goals, but have not given thought to how this impacts the role of our institutions. Specifically, we have institutions based on the principle of independent technocratic decision making, but they are not making politically independent technocratic decisions. So I would describe our current state as actually a bit confused.
The Future of Public Utility Regulation in Ontario
It used to be argued that the current state of a politicized energy regulatory environment was transitional and the model would revert back to the original intention of technocratic decision making. I do not think that this argument is plausible and, in any event, I find it very difficult to identify a scenario where, in fact, Ontario evolves to the conventional model of discretionary regulation that informed the initial framers of Bill 35.
While it is always possible that this could happen, such a change in direction would require an explicit policy shift; there is no path that I can see that leads in that direction today. If anything, in my view, the future will continue to stray further and further from that model. The issues are more political than ever in the sense that the range of values that are engaged is broader than ever. Although economic efficiency is not irrelevant to energy regulation, I think it is now finding it difficult to compete with other considerations, such as industrial policy and environmental policy.
Again, this is not necessarily a bad thing: regulation is a means to an end, so it can be used to serve many ends, and the ends should be determined by the government.
But as I said, I am not sure that our thinking on the role of regulation has kept up with these new realities, so they are getting somewhat out of date, and out of touch.
As a result, the major challenge I see for the future of public utility regulation in Ontario is to come up with a role where regulation has a meaningful and valuable role to play in this more politicized environment.
This is going to require a couple of things.
First, I think that everyone should recognize that the rule book does not provide answers to many of the questions that are facing the sector today and will be facing the sector tomorrow. The problems that we will be addressing are not the typical problems of public utility regulation and the solutions will not emerge from a public utility text book. We will be improvising for quite a period. So, for example, traditional rules of economic expansions of distribution and transmission systems will not lead to the increases in distributed generation and renewable power that society now expects from the electricity system. I know that the OEB has started a review on a segment of this issue in looking at enabler lines and that is a good start. The same level of creativity and open-mindedness will be required to consider other types of expansions. There must be a way to do this consistent with the public interest on some principled and rational basis even if we depart from the public utility regulation textbook.
Second, reconciling political involvement in institutional decision making is going to take some very open, frank, and I hope transparent debates and discussions both within government and within regulators. Governments should not be shy to be direct and blunt in their political expectations of regulators. This will make it more likely that these expectations will be achieved.
Also, regulatory decision makers should be explicit about the role that government policy plays in their decisions. And what I mean by this is explicit recognition of government policy in reasoned decisions.
And finally, there is the rest of us. I have had the benefit of seeing public service decision makers up close and what I have learned is that, to a person, they are deeply driven by the need to make a contribution to serving the public interest. They also thirst for some intelligent input into the broader industry and social implications of their decisions. I find that they are more open minded than you may think.
But it doesn’t help to simply rail against intervenors, or NIMBYism, or how long it takes to make a decision. The reality is there is no regulatory system that cannot be improved by being less bureaucratic or more timely. Regulation is cumbersome, ‘twas ever thus.
But if you think that the agencies are missing the point, if you think their assumptions are flawed, if you think they don’t get it, tell them how they can improve. If you have better ideas, my experience is that these ideas will be embraced.
And who knows, by taking off some of the strictures and traditional approaches towards public utility regulation – those that just don’t fit anymore – we can make a regulatory system that better reflects the values of the people of Ontario. And if so, the future of public utility regulation in Ontario may be a very bright one.